Determining the optimal price for products and services is a delicate balancing act that most retailers handle on a regular basis. The unpredictable nature of demand and consumer preferences means that your pricing directly influences the perceived value of your offerings and sales. If the price is set too low, you might miss out on potential profits, and if the price is too high, you risk losing sales to competitors.
Retailers frequently shift between different pricing strategies to find the optimal price point for their products. One such strategy is High-low pricing, which appeals to consumers’ price-sensitive nature and leverages the psychological impact of perceived savings. This blog covers the essential aspects of High-low pricing, including its workings, pros and cons, and practical insights for seamless implementation.
What is High-Low Pricing?
High-low pricing is a popular retail pricing strategy that involves alternating between high prices and temporary promotions to attract price-sensitive customers. The business launches a product at a higher price point and later introduces promotions such as seasonal deals, clearance sales, and markdowns to improve sales.
The original price is restored once the promotional period is over. The high low pricing strategy (also known as the hi-lo strategy) capitalizes on the thrill of securing a bargain and the fear of missing out (FOMO), compelling customers to make purchases during discount periods.
Importance of Reference Price
The reference price is the original price that you set for a product before any discounts or promotional campaigns. It serves as a benchmark that existing and new customers, both, use to evaluate the attractiveness of a deal.
During a sale, shoppers instinctively compare the sale price with the reference price. The comparison helps them evaluate the value of the deal, which directly influences their purchase decision. If the sale price is considerably lower than the reference price, the deal appears more appealing due to the perceived higher value.
How Does High-Low Pricing Work?
The High-low pricing operates on the basis of price adjustment cycles, which consist of two main periods: the regular price period and the discount period.
The regular price period is the initial phase of the cycle where a consistently high price is maintained for a certain period. The high price set during this period reflects the product’s value and creates anticipation among customers. It establishes a reference price that acts as a benchmark that helps customers perceive the value of the product and assess the worthiness of the current price.
Following the regular price period is the discount period, during which prices are temporarily reduced. The timing of discount periods is often aligned with peak shopping seasons, holidays, or end-of-season sales. The discounts are calculated to attract maximum customer attention while ensuring profitability.
Customers are enticed by the lower prices, which are significantly less than the regular high prices. This perceived bargain can lead to an increase in sales volume as customers are motivated to take advantage of the limited-time offer. Once the discount period ends, the product returns to its original high price point. This is not merely a reversal of the discount; it reaffirms the product’s value and sets the stage for future discount periods, keeping the market engaged and customers anticipating the next cycle.
Timing and Extent of Price Reductions Factors to Consider
Here are the important factors that directly influence the timing and extent of price reductions under this widely used pricing strategy:
- Inventory levels: If inventory levels are high, you can implement a discount period to clear out stock and make room for new products.
- Competitor pricing: As a retailer, you need to stay competitive, and if competitors are offering discounts, you also need to reduce prices to match or beat those promotions.
- Market demand: During periods of high demand, such as holidays or peak shopping seasons, you can reduce prices to attract more customers.
- Customer behavior: You need to monitor customer buying patterns and preferences to determine the optimal timing and extent of price reductions. For instance, if customers are more likely to make purchases during the Labor Day weekend, you need to time your discount period accordingly.
High-Low Pricing Strategy Examples
Retailers often use High-low pricing to ensure sales and maintain profit; here are examples of High-low pricing strategies used by Macy’s and JCPenney:
Macy’s
Macy’s, a renowned retail giant, effectively employs the High-low pricing strategy to attract customers, particularly during sales events like Black Friday and Christmas. The strategy behind their frequent markdowns and promotions is anchored in creating a perception of value and urgency. This approach also allows Macy’s to clear out inventory quickly, making room for new stock.
Credit: Macy’s Website
Macy’s showcases both the original price and the discounted price, visually emphasizing the savings to the customers. This approach, known as anchor pricing, leverages a psychological occurrence called ‘anchoring bias,’ where consumers use the first piece of information (the original price) to make the next decisions. The result? A shopping experience where everything seems to be on sale.
JCPenney
Another major retailer, J.C. Penney’s journey with High-low pricing, also provides valuable insights into the strategy’s implementation and impact. Historically, J.C. Penney used High-low pricing as a key component of their sales strategy. However, in an ambitious move, they attempted to shift to an ‘Everyday Low Pricing’ model in 2011, known as ‘Fair and Square’ pricing.
This new strategy aimed to simplify the shopping experience by eliminating typical sales promotions and maintaining consistent prices. However, this shift to the ‘Everyday Low Price’ didn’t resonate with their customers, who were accustomed to the High-low pricing model and the thrill of snagging a deal.
Recognizing this, JCPenney returned to High-low pricing in Feb-March 2013. This move highlights the importance of understanding customer preferences and the psychological aspects that drive purchasing decisions.
High Low Pricing vs Everyday Low Pricing
When it comes to pricing strategies, high low pricing and everyday low pricing offer distinct approaches; here are the key differences between them:
- Frequency of Discounts: High-low pricing is defined by periodic promotions, creating a cycle of high and low prices. On the other hand, everyday low pricing maintains consistent low prices, offering value without frequent sales.
- Pricing Stability: Everyday low pricing offers price stability and predictability, providing customers with the assurance of consistent pricing. In contrast, high low pricing creates fluctuating price points, bringing in the elements of surprise and anticipation for customers.
- Customer Perception: The perception of value varies under each strategy. High low pricing creates a feeling of excitement, encouraging the customers to take advantage of limited-time deals. Everyday low pricing, however, fosters trust and reliability, appealing to customers who prefer stable and predictable pricing.
- Profit Margins: The impact on profit margins is another key difference. High low pricing can lead to higher profits during promotional periods, capitalizing on the increased sales volume. Everyday low pricing, however, focuses on maintaining steady margins, relying on consistent sales over time.
Benefits and Challenges of High-Low Pricing
As a retailer, understanding the following disadvantages and advantages of High-low pricing strategy can help you leverage this strategy effectively:
Benefits of High Low pricing
- Attracts Price-Sensitive Customers: High-low pricing is a magnet for customers who are always on the hunt for the best deals and discounts. This pricing method works on the psychological principle of perceived savings, which can be a powerful motivator for customers to make purchases.
- Creates a Sense of Urgency: One key element of High-low pricing is creating a sense of urgency. The temporary nature of discounts and promotions can spur customers into action, fearing they might miss out on a great deal. This can lead to increased sales and faster decision-making by customers, boosting your turnover during discount periods.
- Increases Sales Volume: High-low pricing can significantly boost your sales volumes during discount periods. By strategically planning your promotions, you can attract the target customers and encourage them to spend more.
- Clears Out Inventory: By offering discounts on slow-moving or old stock, you can clear out your inventory quickly, making space for new products and reducing storage costs. This can improve your inventory turnover rate and increase your operational efficiency.
Challenges of High-Low Pricing
- Customer Habituation to Discounts: Frequent discounts may result in the customer base expecting a much lower price and waiting for sales, which can reduce full-price sales. One challenge of the high-low pricing strategy is that frequent discounts may lead customers to expect these lower prices and delay purchases until a sale occurs, which can impact full-price sales. While discount periods are often planned and known to the public in advance, businesses need to strategically manage the frequency and timing of these discounts to mitigate this risk.
- Impact on Brand Perception: Excessive discounting can harm your brand’s perceived value and reputation. Customers might begin to link your brand with low prices, which can be detrimental if you are aiming for a premium brand image. It is important to balance promotions with maintaining a premium brand image.
- Inventory Management Complexities: High-low pricing often leads to fluctuating demand, which can make inventory management challenging. Effective inventory management strategies, such as accurate forecasting and real-time inventory tracking, can help manage these fluctuations and ensure you have the right stock levels to meet demand.
- Profit Margin Fluctuations: High-low pricing can result in inconsistent profit margins, with margins being squeezed during discount periods and increasing during high-price periods. Careful planning and analysis are needed to ensure profitability. Strategies for maintaining healthy margins include setting minimum price thresholds and optimizing promotional timing.
How To Set Up a High-Low Pricing Strategy
Implementing a high low pricing strategy involves the following well-planned steps:
- Conduct Market Research: Understanding the market, competitors, and customer preferences is crucial. Conduct thorough market research using methods such as surveys, focus groups, and competitive analysis. This study will offer actionable insights to optimize your pricing strategy.
- Analyze Pricing Data: Pricing analytics play a key role in developing a high low pricing strategy. Use historical sales data, customer behavior insights, and competitor pricing to inform your strategy. FCC Pricing Manager is a powerful tool that uses machine learning models based on demand elasticity and principles of game theory to help ensure consistent pricing performance across categories.
- Develop Promotional Calendar: Planning promotions and discounts in advance is essential. Create a promotional calendar that aligns with key sales periods, such as holidays and special events. This calendar will act as the roadmap for your high and low pricing strategy.
- Set Pricing Tiers: Establish different pricing tiers for regular and discount periods by setting clear price points that maximize perceived value while maintaining profitability. FCC Pricing Manager allows you to alter pricing when stock availability or market prices change dynamically. This flexibility allows you to streamline your pricing strategy efficiently.
- Monitor and Adjust Strategy: Track sales, customer feedback, and market trends to gauge the effectiveness of your strategy. FCC’s Pricing Manager provides real-time monitoring and analysis of competitor products and categories at scale. It also offers granular current and historical data that is available in easily configurable reports. These insights can help you make the required changes to improve your pricing strategy.
How Flipkart Commerce Cloud Can Help Manage Your Pricing Strategy?
As a retailer, managing your pricing strategy can be a complex task. This is where Flipkart Commerce Cloud (FCC) can help, with 15+ years of experience and catering to clients across 14 countries. FCC Pricing Manager offers a rule-based pricing engine for dynamic pricing strategies and provides competitor insights by category, brand, and other breakdowns to help you drive consistent pricing performance across categories.
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